Comm: Precious


Investors need to take note of the oil market, which has been spiking recently. Prices for Brent crude are now above $80 per barrel, a price that would have seemed unimaginable even a year ago, and a world away from the $20s we had in early 2016. The market is partly being driven higher by geopolitics, such as the new sanctions against Iran, but it is also a product of supply shortfalls. Higher prices are now coinciding with all the cost decreases firms made during the market rout, which is allowing them fat margins and the cash to pay dividends and pay down debt.

FINSUM: If the market can stay elevated, which seems likely for a while, then it will be transformative for the many oil and oil-related companies that have been struggling for years.


Many investors may still be shy about buying oil companies. After all, oil had a major fallout jut a few years ago and many factors, like green energy, seem to be playing against the future of oil. Accordingly, most oil companies are playing into this logic by cutting back on spending and boosting sources of alternative energy, but not Exxon. The company is boosting R&D spending and trying to grow its gas and oil output counter to all its rivals. Its logic is that demand for gas and oil is forecasted to grow considerably until 2030 as the world’s middle class surges to 5 bn people (versus 3 bn today). One fund manager comments on Exxon that “We think Exxon’s investment opportunities are world-class and that the best time to invest is when everyone else is retrenching”.

FINSUM: Exxon is trying to keep doing what it does best—produce oil. It is interesting they are taking a different approach to the market, but that means they are probably going to have high beta. If you believe in the strategy, it is an interesting buy.


We tend not to write too much about oil, the reason being our readers don’t seem too interested in it. However, the market has quietly seen a really resurgence over the last year or so, and has risen dramatically from lows in the $20s in 2016 to $75 now. The core reason why is that a booming global economy has pushed up demand for oil (to the tune of 5 million barrels per day), which has largely cleared the glut of oil inventories that had been plaguing the market.

FINSUM: The big question now is whether OPEC maintains the supply cuts. It is worried about higher prices inducing increased production from rivals, but the reality is that Saudi Arabia needs oil prices to stay high right now for several reasons (e.g. IPOing Saudi Aramco, domestic social and economic reforms etc).

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